Tag Archives: CFPA

Senator Sam Brownback has been pushing an amendment in the Senate that would exempt auto dealers from regulation by the Consumer Financial Protection Agency. The auto dealer exemption has gotten a lot of press. The House version of the exemption was the focal point of a Huffington Post story back in December on how the House Financial Services Committee was loaded with moderate Democrats who are weak on financial reform. (That amendment was introduced by John Campbell, a former auto dealer who is no longer an auto dealer but who owns real estate that he rents to auto dealers.)

The argument for the exemption is that regulating auto dealers will — you guessed it — reduce access to credit.* The arguments against are: (a) auto loans are a major source of financing for consumers, along with mortgages and credit cards, so people need to be protected; (b) auto loans provide even more opportunities for ripping off customers than most bank loans, because of the auto dealer’s privileged market position and its ability to shift money back and forth between the sale price and the loan fees; and (c) if you open up this loophole, you will have regulatory arbitrage.

One battle in Washington — the one that has been in the news this week — is over resolution authority and the supposed “bailout fund” attacked by Mitch McConnell. Another battle will be over the Consumer Financial Protection Agency, which Republicans are likely to try to cripple behind the scenes. While most of the reviewers of 13 Bankers have seized on the call to break up big banks, few have discussed the first part of that chapter, which argues for strong consumer protection. Simon and I wrote an op-ed in The Hill to reiterate the point and warn against some of the tactics opponents may use.

A couple of weeks ago, Max Abelson got some investment bankers who used to work at Lehman to say what they really think about ordinary people:

“[Lehman]’s just not that big of an event. But that’s not what people want it to be, so they’ll make it not that way if they can. They just want to be mad and don’t know what they’re talking about and want to be outraged.”

“When I read this, I giggle a little bit. Because $50 billion is a s—load of money, but in the grand scheme of things, $50 billion is a drop in the ocean.”

“Yappers who don’t know anything.”

Well, the commercial bankers are not taking this lying down. They are out trying to prove that they can be just as offensive.

With the financial reform bill out of the Senate Banking Committee last week (another good thing that happened while I was away) and fresh off of victory in the health care war, the Obama administration is upping the rhetorical pressure to pass financial reform. This was most obvious in Deputy Treasury Secretary Neal Wolin’s speech at the U.S. Chamber of Commerce last week, in which he called out his hosts with fighting words: “the Chamber of Commerce – funded, no doubt, with a good deal of your money – has launched a lavish, aggressive and misleading campaign to defeat the proposed independent agency.”

Elizabeth Warren, who has never minced words when it comes to enemies of consumer protection, steps up today with an even more withering attack on the flip-flopping of the American Bankers Association, which was for the separation of consumer protection from prudential regulation before it was against it. As Warren says:

“ABA lobbyists now aggressively insist that separating consumer protection and safety and soundness functions would unravel bank stability. Yet just a few years ago, they heatedly argued the opposite—that the functions should be distinct.

“In 2006, the ABA claimed to act on principle as it railed against an interagency guidance designed to exercise some modest control over subprime mortgages. It criticized the proposal for ‘combin[ing] safety and soundness guidance with consumer protection guidance, creating confusion that is best addressed by separating them.'”

The National Association for Business Economics does a semi-annual Economic Policy Survey of its members, who are primarily private-sector economists. The March 2010 survey isn’t up on their site yet, but this is what it has to say about the Consumer Financial Protection Agency:

“A key point of discussion in Congressional deliberations on financial services regulatory reform has been the establishment of an independent agency focused on consumer financial protection. Fifty-four percent of survey respondents feel that creating such an agency would not impair safety and soundness regulation; 25 percent believed it would be detrimental. On a related issue, 43 percent of respondents indicate that a consumer financial protection agency would not impair access to credit while 39 percent believed it would.”

The financial sector has been demanding that any new consumer protection agency be made subservient to the traditional safety and soundness regulators, and has also been threatening that greater regulation will make credit harder to come by. Apparently the business community–a group that is pretty skeptical about government, judging by some of the other survey responses–isn’t buying it.

This guest post was contributed by Norman I. Silber, a Professor of Law at Hofstra Law School, and Jeff Sovern , a Professor of Law at St. John’s University. They were principal drafters of a statement signed by more than eighty-five professors who teach in fields related to banking and consumer law, supporting H. 3126, which would create an independent Consumer Financial Protection Agency. Some of the research on which this essay is based is drawn from an article by Professor Sovern.

Did under-regulated lending to consumers play a big part in destabilizing the financial system? Many knowledgeable people say yes, but Professor Todd Zywicki disagrees. (“Complex Loans Didn’t Cause the Financial Crisis,” Wall Street Journal, February 19, 2010). He claims that the present troubles resulted from the “rational behavior of borrowers and lenders responding to misaligned incentives, not fraud or borrower stupidity.”

Professor Zywicki’s argument enjoys, at least, the modest virtue of technical accuracy, because many objectionable misleading sales practices and agreements that lenders used were, and continue to be, unfortunately, quite legal. Lending practices may have been regularly misleading and confusing and reckless-but fraudulent? Well, no, usually not unlawful by the remarkably low standards of the day. But that in itself is an argument for saying consumer protection laws failed.

“So here’s the situation. We’ve been through the second-worst financial crisis in the history of the world, and we’ve barely begun to recover: 29 million Americans either can’t find jobs or can’t find full-time work. Yet all momentum for serious banking reform has been lost. The question now seems to be whether we’ll get a watered-down bill or no bill at all. And I hate to say this, but the second option is starting to look preferable.”

Krugman says he would be satisfied with the House bill, but that the need to bring moderate Democrats and at least one Republican on board in the Senate could lead to a severely watered-down bill, in particular one without a Consumer Financial Protection Agency. Instead of accepting such a deal, he says:

“In summary, then, it’s time to draw a line in the sand. No reform, coupled with a campaign to name and shame the people responsible, is better than a cosmetic reform that just covers up failure to act.”